Public Economics and Government

Public Economics

• Studies government intervention in the economy, analyzing how policy affects individuals and resource allocation.
• Provides a framework for determining the need for public intervention in the market.

Political Economy

• Lies at the boundary of Political Science and Economics.
• Concerned with collective choice, conflict, and institutions, and how the political environment affects economic outcomes.

Government Views

• Organic view: considers government as the heart of society, with individuals being parts of a natural organism.
• Mechanistic view: views government as created by individuals for individuals.

Role of Government

• Size of government can be measured by annual expenditures, such as purchases, transfers, and interest payments.
• Budget documents include unified budgets (itemized list of revenues and expenditures) and regulatory budgets (economic costs of government regulations).

Role of Theory

• Economic models provide frameworks for thinking about factors influencing behavior and generate hypotheses for empirical testing.
• Virtue of simplicity: reducing problems to their essentials.

Empirical Analysis

• Used to test hypotheses, focusing on correlation vs. causation.
• Conditions for government action X to cause societal effect Y:
  • X must precede Y
  • X and Y must be correlated
  • Other explanations for observed correlation must be eliminated

Experimental Studies

• Randomly assign subjects to treatment or control groups to study the effects of an intervention.
• Randomization improves the chances of similar characteristics between groups.

Pitfalls of Experimental Studies

• Ethical issues
• Technical problems
• Response bias
• Impact of limited duration
• Generalization of results to other populations, settings, and treatments

Observational Studies

• Rely on observed data, not obtained from experimental studies.
• Sources of observational data: surveys, administrative records, and governmental data.
• Econometrics: statistical techniques to establish and estimate causal relationships in absence of randomization.

Types of Observational Studies

• Cross-sectional data: information on individual entities at a given point in time.
• Time-series data: information on a single entity at different points in time.
• Panel (longitudinal) data: combines features of both.

Pitfalls of Observational Studies

• Data collected in non-experimental setting
• Difficult to ensure a valid "counterfactual"
• Specification issues: not all variables are available or measurable.

Positive and Normative Theory

• Positive Theory: explains the causes of an economic phenomenon.
• Normative Theory: states what should be done to reach certain results.

Economic Policy Model

• Controllable if the political authority can pursue its objectives.
• Goals can be fixed or flexible.
• The golden rule of Tinbergen (1966): the number of instruments available to the policymaker must be at least equal to the number of objectives.

Welfare Economics

• Concerned with the social desirability of alternative economic states.
• Composed of different streams of research, including old and new welfare economics.
• Focuses on individual satisfaction (utility) and wellbeing, studying how market structures and resource allocation affect overall well-being.

Efficiency

• "Getting the most out of the resources used."
• Pareto Efficiency: a particular sort of efficiency, where it is impossible to increase an individual's utility without worsening that of at least another.